Chevalier Harry D. Schultz, KHC, KM, KCPR, KCSA, KCSS, is the highest paid investment consultant in the world at US$2,400/hour—US$3,400/hour on weekends (International Edition Guinness Book of Records 1981-2000.) International Harry Schultz Letter

(While Mr. Schultz is not listed in the year 2000 edition of the Guiness Book of Records, he did receive a very thoughtful letter from the publishers explaining why.  It seems they have 80,000 different records in their database.  But they only have space for 3,500 in each edition.  So they must rotate which are listed, which are not, each year.  They assured to Mr. Schultz that he is still the titleholder of the Highest Paid Investment Consultant, a title he's held consecutively for the last 20 years.)

Mr. Schultz is regularly quoted in books, articles, and interviews and by other newsletters (the "alternative press"). Arthur Hailey, a longtime personal friend and HSL subscriber, based his character Lewis Dorsey in the bestseller The Moneychangers, directly on Harry Schultz. Harry has lived for extended periods in 18 nations, and shorter periods in many others. Knighted five times, Harry is a man for all seasons and a true citizen of the world.

Harry Schultz International Letter, Full Market Update

Gold shareholders: My motivation in pushing gold mine chairmen to close out their hedges quickly is to help them realize the danger, as follows: A gold bull mkt (which will ignite on a 2-day close over 305) will later, freakishly & ironically, bust most investors holding shares in gold producers who have hedges of any kind. Gold will, IMO, streak first to $354 (that number produced via derivative extrapolation), where all hedged mines will bankrupt, & central banks will sell gold, sending it back to $270-$300 (?) scaring out the bulls. But derivative damage will have been so great, & mine output slashed, the price will resume its rise (as it did after a 50% fall in 1974-76 from $200 to 100), till it reaches $1,450 or better, drawing in the bulk of the public at prices over $354, 529 & 800. Then when every short has covered, who will buy? Nobody, & the fall thereafter will be so violent as to disqualify gold as a reserve asset, for such volatility. There would go our hopes for a return to the Gold Standard. The result could be gold back to $35 in our lifetime. We must prevent that. Read on.

A mega-derivative squeeze is coming from Hung Fat & Dr. No. (ie, 1-2 trillionaire Chinese), which will shred the present day gold cartel into confetti. With them will go all the hedged mines! And their shareholders! Currently, U must note the concentrated gold buying on reactions, very different from the past 2 decades. Gold's bull move will only help Hung Fat & Dr. No & traders using our new gold chart service (& following it when the stakes are high & unrealized!). Before Central Banks fight the $305 & $354 levels, gold producers have the greatest (& last) opportunity in their corporate lifetimes to 'get the hell out' of every hedge position. They risk class action suits & worse if they don't. There is very little time left to do this.

They'll say they can't get out due to bank contracts to hedge their new production during the lifetime of the loan. That's true. Solution: during rallies, pay off their development loans by issuing convertible bonds as Agnico Eagle just did, thus financing their development debt in this traditional way. As a bull market will cause a convertible bond to rise, they'll have the debt exhausted without ever having to pay it by the conversion of the bonds into common shares. As the bonds were issued to pay off their development loans there'll be no dilution to present shareholders. It's win/win & nobody goes broke. Gold producers are saved. Investors in gold producer shares are saved. Gold itself is saved.

Even if mine hedge position is taken to a real hedge posture without possible gain or loss (balance) the contract can fail selectively (ie, 1 leg at a time, among many legs), which would cause the position to become totally dangerous. Gold producers must expunge from their books every single gold hedge transaction & leased gold commitment before it is too late. Re gold hedges for the carry trade or for non-gold related financing, who cares? If producers need any help on how to convert production debt out of the need for a hedge position, & pay off non-recourse loans before the gold freight train hits, get in touch with HSL. I'm taking back the lead cape I took off in 1981. We have to save the producers from themselves (& the banks), save gold shareholders who will be tricked by wild whipsaws unseen to date, & save hope of a Gold Standard. It's time to stand up & be counted & get smart.

Gold shareholders should send the letter below to the chairman of every mine that hedges its gold production forward, in which U own stock. A chairman is legally responsible to shareholders for managing his management. After receiving this letter the board chairman can never claim to not have known that derivatives carried extreme legal & structural risks. This letter may end derivative hedge book trading in the manner used today. U can print this out from email or ask us to send U a fax copy or photocopy this letter & clip & recopy. Add your name.

We seek to protect the hedging mines against themselves, thereby protecting their shareholders, which are our collective selves. We also recognize an obligation to certain developing nations, giving them the opportunity to mine gold, thus protecting them. The ultimate Murphy's Law is to have a gold bull market break the producers (via derivatives) & thereby break gold bulls. World monetary stability is also involved, about which more another day. Here's the letter:

Dear Mr. Chairman:

In light of the recent accounting & Enron scandals, I require answers to certain questions concerning the condition of your hedge book as a whole & the specifics of each individual hedge transaction. Your present reporting does not detail these key items that are critical to an investor's ability to calculate the risk factors of investments in your/our company.

1. What percentage of the funds that you have taken into earnings or deferred earnings originating from your hedge transactions in the past five years are free from the necessity of maintaining your present hedge contracts?

2. In derivative contracts with derivative dealers does the right of offset exist? That means should the dealer enter insolvency while owing money to us, can we charge that indebtedness against what we may owe the dealer?

3. Have we dealt with a well-known substantive investment or commercial bank, or with a subsidiary of that entity? If answer is a subsidiary of the investment or commercial banker, in what nation is subsidiary domiciled? What are legal/capital/bankruptcy laws of that domicile? This information is necessary to assess real credit risk.

4. Is the subsidiary of the investment or commercial bank entitled to an automatic fund forwarding from the parent to cover the "Trade Debt" of the subsidiary, if the subsidiary fails? If not, then we would have to cover the failed commitments, as margin calls do not wait for litigation outcome.

5. If we have dealt with a subsidiary of the investment or commercial bank, have you seen the balance sheet of that subsidiary & the audited amount of total nominal value of derivatives granted by that entity to others? Without this, no reasonable calculation can be made of our credit risk involved with this dealer.

6. If we have dealt with a substantive investment or commercial bank in hedge derivatives, has the board been apprised of the condition of an audited statement of the nominal value of all derivative granted by that institution to others? If we have not, then regardless of the hundreds of millions or billions in capital, no meaningful quantification of the risk factor has been made.

7. Can we trade entire option hedge book in totality with any dealer we wish or are we obligated to one granting dealer when changes or closure are required or desired? If we can't take our position in totality, or leg by leg, to any dealer we have severely restricted our liquidity & tied ourselves to the financial condition of our counterparty.

8. Assuming we used a leased gold contract as part of the hedging program, do either ourselves or the dealer have the obligation of returning the gold, re-leasing the gold or replacing the gold at the end of the standard term of lease (which is 1-year) required by all central banks. Does the Board realize: no matter what our contract says with the gold bank, the leased gold needs to be re-leased, replaced or covered at the end of each year regardless of the fact that our hedge position goes out to 10 years forward? Is our dealer capitalized to guarantee this performance, not only to us, but also to every other producer they deal with?

9. Regarding the specific hedge instrument:
a. Was the trade transacted over the counter or on a listed exchange? b. Is there any regulatory body presiding over the transaction? c. Are prices of these instruments in public record anywhere? d. Was price of the instrument determined by computer modeling? e. Is there any open market for each leg of the hedge transaction?

10. Regarding legal considerations:
a. Are you familiar with legal precedent set in the early 1990s in Southern District of Manhattan Federal Court whereby validity of a transaction is determined by capitalization of a transaction versus nominal value of the transaction? b. Are you familiar with legal precedent concerning validity of a commodity transaction being determined by the timely & industry standard execution of a margin call?

I require prompt answers to these questions, as without this knowledge no reasonable conclusions can be gained concerning the actual risk our company has, regardless of our company's position in the industry or the size of your treasury. If you have not reviewed all these criteria of the individual hedge contracts, dealer's stability by documentation, & freedom to deal for closure by individual leg or by total spread position with any dealer of your choice, I would feel you are not fulfilling your duty to us.

Sincerely yours,

***Here's a review by Chris Powell, Secretary/Treasurer of Gold Anti-Trust Action Committee (GATA), on our friend Ron Paul's brief exchange with Greenyspin last week (before the House Financial Services committee). Ron Paul was chomping at the bit - but there's a limit to what can be said if credibility isn't to be lost.

'Rep. Paul uses four-letter-word in exchange with Greenspan, who ducks.'

"Our hero, U.S. Rep. Ron Paul, R-Texas, had an interesting exchange with Federal Reserve Chairman Alan Greenspan today before the House Financial Services Committee, wherein the most terrifying four-letter word in Washington was heard: G-O-L-D.

"Paul cited a speech Greenspan gave in January to the American Numismatic Society in which Greenspan seemed to question whether the fiat monetary system would continue to work. In that speech, Greenspan had joked that, if the fiat system failed, the country might have to go back to using sea shells and oxen as money, and he promised that the Fed's discount window would maintain an adequate supply of those things.

"Paul suggested that managing the Fed is like managing Enron, insofar as their accounting is similar. That is, Paul said, money is borrowed into being in the United States -- the government borrows money, issues instruments for that debt, and then those debt instruments are treated as assets on the books of everyone holding them.

"In earlier remarks to the committee, Paul noted, Greenspan said Enron had operated by "capitalizing its reputation while holding few assets." Paul said this was just like the Fed itself.

"Then the four-letter word came in. Gold, Paul said, is giving a hint of inflation despite the efforts of central banks to push the gold price back down.

"Greenspan did not respond to Paul's remarks about gold, and since just moments earlier Greenspan HAD disputed remarks by Rep. Bernard Sanders, D-Vermont, about market concentration in certain industries, it's a fair assumption that Greenspan CHOSE not to deny that central banks are trying to suppress the gold price.

"The Fed chairman told Paul that he "hoped" that there are "fundamental differences" between Enron's and the Fed's operations.

"Fiat currency, Greenspan said, indeed has been mismanaged into inflation, but, he added, "We're learning how to manage fiat currency."

"Of course with a little candor Greenspan might have added that managing fiat currency lately has been a matter of managing the gold price too.

"Greenspan said he remained skeptical of fiat currency but recent evidence "is that it has succeeded."

"Well, let's all stick around and see how much longer it succeeds.

"Greenspan concluded his reply to Paul by saying that "I don't perceive" that the Fed is doing anything like Enron. The Fed, the chairman said, is being "transparent," but added, tellingly: "except where it inhibits the Fed's ability to function as a central bank."

"Committee members are allotted only a few minutes at these hearings, and Paul could not follow up on Greenspan's reply. But Greenspan's conclusion seemed to acknowledge that he seems the basic functions of a central bank as requiring keeping the public ignorant about the most important stuff.

"With luck that important stuff may be discussed if a hearing is ever held on Paul's legislation to require the Treasury Department, the Exchange Stabilization Fund, and the Fed to get the approval of Congress for any intervention in the gold market.

"Some of our people are upset that CNBC's coverage of Greenspan's appearance before the House Financial Services Committee was interrupted during Paul's questioning as the network switched to a hearing on Enron. Whether or not this was the result of CNBC's hatred of gold, which is the enemy of all the imaginary investments CNBC has touted for years, you can see the Greenspan-Paul exchange for yourself over the Internet, courtesy of that ever-more-wonderful network, C-SPAN.

Go here:

http://www.c-span.org/congress/

"Scroll a third of the way down the page and look for the "Recent Programs" section. At this hour the second entry is for Greenspan's appearance. Click on "watch," and good luck."
END.

David Tice of the Prudent Bear Fund also received a lukewarm reception from CNBC, when interviewed by Mark Haynes last week. And, surprise, surprise, his interview was also chopped abruptly to switch to the Enron hearing! Seems CNBC prefer giving more airtime to fund managers who are proud to have 'lost less' than the indexes, than those who have notched up REAL profits. It truly is a sad world.

***After all that heavy stuff, we wanted something to brighten up FMU, so we reviewed the Japan Times. Our mistake :-((.

Still every cloud has a silver lining. At least large retailer same-store sales by department stores edged up 0.1 percent thanks to their sales promotion efforts!

'Wholesale, retail sales slide again.'

"Combined sales by Japan's wholesalers and retailers dropped 5.4 percent from a year before in January, marking a 12th consecutive monthly decline, the Ministry of Economy, Trade and Industry said Wednesday. The combined sales figure stood at 42.95 trillion yen.

"Sales by retailers fell 4.7 percent to 10.54 trillion yen, marking a 10th straight monthly decline, while those by wholesalers dropped 5.7 percent to 32.41 trillion yen, logging a 12th straight tumble.

"Sales by large retailers -- supermarkets and department stores -- declined 2 percent on a same-store basis, marking a 45th month of decline since April 1998.

"Sales by clothing retailers decreased 6.7 percent, marking a 58th successive monthly loss. Those of food and drink retailers fell 5.5 percent, logging a 33rd straight dip.

"Auto dealers suffered a 4.8 percent sales slide, marking a fourth straight monthly dip, while home appliance retailers logged a 7.3 percent fall, posting a 10th month of decline.

"Fuel retailers suffered a 5.5 percent slip, logging a fifth straight monthlydecline.

"In the large retailer category, same-store sales by department stores edged up 0.1 percent thanks to their sales promotion efforts and consumers' preference for high-end bags, shoes, accessories and foodstuffs.

"Supermarket sales decreased 3.5 percent, logging a 45th successive monthly decline, partly due to slumping sales by struggling Daiei Inc.
"Convenience store sales slid 1.9 percent, logging their 18th straight monthly drop, due to falls in unit sales, the ministry said."
End.

A foretaste of things to come in the west?

***From lemetropolecafe.com (Feb 25): If you leave a party early because signs of trouble are brewing, it usually results in sneers. But, it seems as if Deutsche Bank are prepared to run the gauntlet to avoid being bottlenecked at the golden fire exit. Sensible lads!

'After Bundesbank Gold Story, DEUTSCHE BANK TURNS BIG BUYER (smell a rat?)!

"As reported recently and often, The Gold Cartel has thrust gold back every time that level has been breached to the upside for 3 1/2 years now.

"Of special interest this time is that the specs are mostly long below $290. If the cabal wins again (taking gold below $290 on a close basis), many of these black box tech specs will turn sellers and prolong the inevitable gold market bull move.

"Gunning for the specs, the Gold Cartel forces were loaded for bear last week and were close to winning the day when Deutsche Bank showed up as a big buyer right above $290. Word to me was they could not buy enough at their price levels in the futures pits so they called upstairs and began buying in the physical market.

"This may be MOST significant. Deutsche Bank is named in Reg Howe's Complaint and I used to hear about them all the time on the sell side along with Goldman Sachs and Chase. See this reading from Reg Howe's lawsuit:

"On May 7, 1999, just as gold threatened to surge over $300/ounce in response to new doubts whether the proposed IMF gold sales would go forward, the British announced that the Bank of England, on behalf of the Exchange Equalisation Account in the British Treasury, would sell 415 tonnes of gold in a series of public auctions. Although this announcement came with no warning and was completely unexpected by most, the previous evening Bill Murphy of GATA reported in his Midas column at Le Metropole Cafe: "Deutsche Bank's bullion desk is calling their clients saying that the gold market is stopping at $290."

"On May 10, 2000 GATA presented its "Gold Derivative Banking Crisis" document to the Speaker of the House, Dennis Hastert. Several of the GATA army made sure copies were sent to the Bundesbank, etc. Twenty thousand copies were downloaded from the www.GATA.org web site.

"Then, on August 25 Germany's premier financial business newspaper, Frankfurter Algemeigne Zeitung, surprisingly published two articles in its paper about the GATA document. They were very blunt, got to the heart of GATA's concerns and complimented the authors. Both articles were most unusual in that there were no contrasting rebuttals.

"It was clear to some very savvy people that some higher ups in the Bundesbank planted the articles to warn Deutsche Bank about their short gold positions. We had heard for some time about a rift at the Bundesbank about gold between the young turks (anti-gold) and the old guard (pro-gold).

"Following the articles in FAZ, I cannot recall hearing anything about Deutsche Bank on the Comex, until TODAY. Not that they have not been there, just that their name was never brought to my attention again, unlike Goldman Sachs, which has been a cabal gold seller at all critical times. In addition, Deutsche Bank has reduced their gold derivative positions since the FAZ stories were published.

"Then out of the blue last week, the gold world is presented with the strange, Bloomberg Bundesbank gold story - reminiscent of the Russian gold selling rumor circulated by J. P. Morgan Chase in May 2001. Both stories were planted to generate gold selling by frightening gold longs that the central banks were going to sell their gold. Both planted stories worked.

"The Bundesbank story, however, only worked to a very modest degree as gold only dropped $6-$7. Why? I suspect it is because the gold fraud is about to end. Perhaps, the Germans want out while the getting out is good and figured the best way to cover massive gold short positions was to generate a bogus central bank selling story and then start buying.

"The German bankers cannot be THAT dumb. They must want to cover as many gold shorts as possible before disaster rules the gold day, a day that is now inevitable. If the Germans have lent out as much gold as we think they have, they need to get it back or declare the scam to their citizens. To buy any kind of size at decent prices the Germans need to buy into a falling market. If this anecdotal hypothesis is right, we will see them on the buy side some more. My guess is they have a huge amount of buying to do.

"If that is the case, the only question may be whether they will be buying at $285- $292, or perhaps $302 to $307.

"It would appear we are witnessing the first visible signs of a disintegrating Gold Cartel. One of their rats could be leaving their sinking ship. We shall see, but today's development may be a gold milestone. It bears close scrutiny."
End.

***Thom Calandra's right on the ball again. CBS.MarketWatch.com (Feb 28):

"Averaging down" in a bear market, some newsletter writer once said, is a lot like riding the down escalator at your favorite department store. Buying on the dips won't work the magic it did in September 2001 and through much of the 1990s for one easy reason: it's a lousy market.

"Q4 GDP revised up to 1.4 percent
GDP-inspired gains in U.S. stocks fade
US jobless claims rise 17,000 after upward revision
Gateway slumps 14 percent after loss warning

"Indeed, it's still an expensive market -- more than 50 times trailing earnings for the priciest of the blue-chip stocks. Top insiders are selling shares at big companies such as Intel, Pepsi and IBM.

"The pioneering technology and media companies, like Sun Microsystems, Cisco Systems and AOL Time Warner, are either busy writing off a ton of goodwill or wondering how to defend their still-excessive valuations, even with the swoons that have taken their stocks to multi-year lows.

"Wall Street, meanwhile, keeps pumping the bargain-hunters' theme. Banc of America Securities earlier this week said the decline in Sun Micro's shares had created an "attractive entry point." To be sure, a stock that is down by a third in just eight weeks almost certainly has room to rise a point or two. But in the case of a Sun, or a Cisco -- two companies that are achieving minimal return on investment capital these days -- the gains an investor can expect are paltry.

"Now that the profit-growth angle has all but disappeared from the lexicon of Wall Street and these companies' quarterly press releases, only one thing keeps their flailing stocks in the game: the notion of mergers and acquisitions. The prospect of a mega-merger or two, especially in the worlds of media and technology, is a beautiful thing. We all can dream, after all."

***It seems manipulating mkts (in national interest - bien sur!) is a win-win situation. It can lead to healthy profits, & ensures Joe Public sits mesmerized as his life savings disappear perhaps - but Oh, in such 'orderly' fashion! HSL has been down this road so often the tarmac is wearing thin, but ideas are finally catching. Some good stuff from Daan Joubert, on www.gold-eagle.com, Feb 2002:

'Strong dollar and weak gold'

* "US consumers are, with the exception of some unique circumstances - such as the special offers on durable goods, including zero cost finance, during 4th Quarter last year, that triggered a massive jump in household debt - no longer keen to add to their debt in order to spend.

* "As a consequence, the US economy was winding down from its high growth rates of recent times well before events of 11 September last year and would probably have been worse off now if it were not for increased US official spending since then.

* "Bush has made the health of the US economy and its markets an issue in the War on Terror - according to the new Bush doctrine, if any of the US markets should fail, it would mean a victory for bin Laden and al Queda.

* "The US dollar is a key in this battle. A firm to strong US dollar is essential if inflows of foreign funds are to be maintained - firstly to prevent a foreign sell-off of US assets and secondly to keep the dollar itself steady given the large trade deficit.

* "Exposure to short gold positions by the large US and other bullion banks makes it imperative to keep gold from breaking substantially higher. This would bring the risk, if not the inevitability, of failure of some of the larger US financial institutions and thus wreak havoc on the global financial system and the global economy.

* "A strong gold price could also trigger a melt down of the US dollar.
Although the slogan "Gold is Dead" has often been heard over the past 5-6 years, the fact is that people of wealth have long memories and when they can no longer trust the dollar, Gold will become King again - as is happening in Japan.

* "The gold price has moved consistently higher, despite rumors of sustained attempts to keep the well-established lid in place, and has been threatening for some weeks now to blast through the psychological $300 level

"Under these circumstances it would be really very strange if US authorities and vested interests failed to intervene in these markets - and were not doing all they can to keep the dollar on an even keel, perhaps even gaining slightly all the time, in order to keep foreign investors not only happy but also willing to send more money to the US.

"This effort, by extension, also implies moves to contain the gold price below $300, and preferably well below that level.

"Clues and suspicions One of the complicating factors for the US authorities have been the formal acceptance of the Euro as a real currency - and thus as a second reserve currency next to the dollar. China, for example, has announced they are converting (some 10%?) of their reserves from dollars to Euro's. Other countries might be doing the same, only without the formal announcement of their actions.

"It was important for the US to balance the supply of US Treasuries that would hereby come onto the market with fresh demand. Luckily, Japan offered a solution. Given the state of Japan's economy, their banks and financial system, it was easy to suggest to the Japanese authorities that an effective devaluation of the Yen would offer a way out of their problems. Obviously, doing so would imply sustained buying of US dollars by the Bank of Japan and using these to buy US Treasuries. 'Hey Presto!' Problem solved.

"But on the local US scene the Enron debacle has brought to light other problems. For a long time the use of 'pro forma' statements by corporations to provide a positive spin on their results was an accepted practice. Nobody really wanted Wall Street to collapse and if the books were cooked a little - sometimes quite a lot - to make things looked better than they really were, who was to worry?

"But Enron changed that. Suddenly cooked books were equated to massive bankruptcy and the loss of billions. This was no longer acceptable and corporate accounts were being scrutinized to detect any strange entries or hidden dealings - more so after it was reported that the top 100 Nasdaq corporations declared to their shareholders (and the media!!) that they had collectively made $19 billion of profit during the first 9 months of 2001.

"Yet, the report continued, in accounts submitted to the SEC, where creative accounting procedures are frowned upon, they admitted to a combined loss of $82 billion over the same period of time.

"Now we can expect very much tighter accounting practices when US corporations report for the first Quarter of 2002 - and thus a more accurate reflection of real, substantially lower, earnings - at a time when turnover is likely to take a dive as consumers curtail their spending. This double whammy should mean that announcements of earnings will be very much lower come April. With the PE on the Dow 30 already said to be about 40, even just a 33% decline in declared earnings will, at current prices, bring the PE on the top 30 US corporations to 60 - into a region that might be considered reasonable for a small start up high-tech company, but not for these giants.

"All of the above is surely not a secret to anybody who reads between the lines. But it means that US authorities and institutions will be using everything in their power to keep control of the US dollar and of the gold price. And because of the critical importance of success for the global economy, it seems more than likely that other governments and central banks will have sympathy for what the Americans are doing and may even be actively involved in the process.

"The US dollar and the gold price In support of the above speculation, it has been evident for some time that there were strange goings on with respect to the US dollar and the gold price.

"Not only was the dollar remaining strong despite a near universal opinion among private and other more independent economists and financial experts that the dollar was over-valued, when examined in terms of its fundamentals - the trade deficit and the steep rise in the US money supply, among others - it also was exhibiting a weird pattern of gradual decline on days when it seemed as if Wall Street would enjoy some good news. Yet it tends to firm on days when the Globex futures market and fresh news warned that Wall Street could open weaker. A strange consistency.

"This means that barring any exceptional event happening or condition arising to shatter the complacency of investors in the US, the US dollar can be expected to trade within an acceptable range - acceptable in the sense that a steep rise in the value of the dollar may just trigger the kind of profit taking that is being prevented, while the same disinvestment could happen if the dollar should suddenly lose too much value.

"There is a comfort zone for the dollar against the other major currencies - say between ¥130 and ¥135 and also between $0,90 and $0,85 against the Euro - that appears to keep most foreign investors happy. And for those who watch the US dollar index, a rising dollar against the Yen is generally offset by a slightly stronger Euro, and vice versa.

"On Wall Street itself there is evidence that on weak days the Dow 30 index is being used to provide a more positive spin on the market. This most widely followed Index is quite easy to manipulate for someone with a reasonably deep pocket. It is an arithmetical and un-weighted Index with a dollar in the price of any of the 30 stocks being equal to about 5 Dow points. Simply take out all the offers for a range of say $5 on one of the expensive 30 Dow stocks - doing so at an opportune moment - and the Dow Jones jumps 25 points in a minute or two. This is often sufficient to get all the well-conditioned bottom feeders waiting for just such a signal into action too and very soon the Dow is up 80 or a 100 points, with the other indices following. And another, "Hey! Presto!!"

"Then, more often than not, the stocks that had been purchased an hour or two before can be off-loaded at a profit to prepare for another rainy day."
END.

Key points in this essay are: Bush has linked the failure of US economy to a victory for Al Queda (making it unpatriotic to save or take personal financial decisions that counter national interests); U$D must remain strong to ensure the flow of $1bn per day of foreign assets (to fund the trade deficit); if gold explodes so will many major US financial institutions (& the US$).

Can ANYBODY still doubt US govt is doing ALL within its power (& a lot out of its legal 'power') to keep the boat afloat? 'So what', cheer the crowds - as long as it works. Unfortunately, history shows it ALWAYS ends in tears. True, pay time may be extended - but so will the final bill to pay - plus compound interest.

***Time to shift focus to more feasible returns in Europe?
From Bob Chapman of 'The International Forecaster' (Feb 16):

"A very strong case can be made for lower US share prices when they are compared with European stock prices. That's based on the premise that European shares are only somewhat overvalued. US stocks trade at 33 times trailing earnings. The historic norm is 14.5 times, while Euro stocks trade at 19 times. American stocks trade at 3.3 times book value and offer an average 1.4% dividend yield, while in Europe stocks trade at 2.3 times book and yield 2.5%. The enormous differential is because US stocks are very overpriced and European stocks are somewhat overpriced. The multiples that both trade at and projected 2002 earnings is, the US 31 times and Europe 18 times. The level is closer but both won't be anywhere near these estimates. They'll be substantially lower."

***The widely watched US Consumer Board Consumer Confidence index measure of consumer confidence plunged for the 1st time since its rebound from the Sept 11 attacks last week. The revised composite index (based on survey of approx 5,000 households) fell to 94.1 from 97.8 in Jan. Both the current & expected job situation & assessments of business conditions weakened in Feb. The present situation component is at a new low, & 23% of surveyed consumers perceived business conditions as bad.

The weaker assessment of the US economy was broad based across income & age groups. No surprise as hopes for the stimulus package fade & the proposal to extend unemployment insurance benefits beyond the usual 26-week period remains stalled due to additional House demands. Two million US workers are expected to exhaust their unemployment benefits during the 1st ½ of the year.

***University Of Michigan Consumer Sentiment Survey released last Friday confirmed a general downturn in consumer confidence. Their consumer sentiment index dropped more than expected to 90.7 in Feb, compared with 93.0 in Jan. The expectations component fell to 97.2 in Feb, against 91.3 in Jan, while the present conditions component rose slightly to 96.2 in Feb, from 95.7 in Jan.

***NEW US home sales nose-dived 14.8% from the upwardly revised Dec figure of 966,000. The drop left sales at 823,000, the lowest reading since June 2000 & declining at their fastest pace since 1994. Main US regions touched by falling sales are the South & West, where sales dropped 22% & 17%. Midwest fell a moderate 0.6% while sales in the Northeast increased by 9%. Dwindling home sales have now increased the inventory of new homes for sale to 4.6 months, the highest level since June 2000, but median house appreciation is up 7% year-over-year.

***US initial jobless claims for unemployment insurance jumped to 378,000 week ending 2/22, from a downward revision of 361,000 of the prior week. The 4-week MA on this choppy indicator drifted to 373,250 week ending 2/22, its lowest level since March 10 last year. Continuing claims also rose week ending 2/16 to 3,492,000. The insured rate of unemployment remained firm at 2.7%, a level it has held for the past 8 weeks, after peaking at 3.1% in mid November.

***US GDP for 4th quarter growth upwardly revised to 1.4%, much stronger than expected. Consumer spending growth revised to 6.0% annualized in 4th quarter, but when the $60bn rise in auto sales are excluded, consumer spending growth was less than 2.5%. Fixed investment fell 11.0% in Q4, due to the down turn in construction. Nonresidential structures fell 32.6%, while residential was down 5.0%. Investment in equipment & software continuing its downtrend dropping 4.8%. Cutbacks to private inventories almost doubled in Q4, which sliced 2% points from growth. Most positive indicator for future conditions was the 32.9% annualized rise in computer equipment spending. GOVT spending also increased SHARPLY after 3rd quarter disruptions. The deterioration to the trade balance was limited, as the fall in exports moderated during the quarter.

Upward revision driven by strong consumer spending offsetting weak business purchases, but storm clouds brewing as new consumer confidence surveys reveal sharp drops in confidence.

The main definition of recession is 2 consecutive quarterly declines in overall output. Officially, the upward revision to 1.4% growth rate for the last quarter 2001 (from an earlier estimate of 0.2%) implies the US recession may never have been. Effectively, US GDP declined in the 3rd quarter 2001 by 1.3%, but the latest GDP figure now voids the 2 consecutive quarters of decline. IF confirmed it would make it one of the shortest & mildest recessions in US history.

At HSL we think the US economy is perking up as the morphine shot of MEGA GOVT spending & artificial/manipulated mkt stimulus (zero financing binge, etc) takes hold, but when the 'pain killing' effects wear off - we're back to our forecast of a double dip scenario. Only time will tell if we are right! Last Fridays big mkt jump was a 1-day "buying climax", says top timer Chris Cadbury.

S&P500 Index

The S&P 500 Cash Index closed Friday Mar. 01 at 1131.78 ie, 20.64 points below its 200-day moving average.

The Commitment of Traders report shows S&P500 commercial hedgers added 629 longs, bringing total longs to 355,905, whilst shorts added 3,796 contracts, bringing total shorts to 416,664. Large speculators are holding 29,091 shorts against 35,877 longs. And, small traders are holding 130,856 longs against 63,311 shorts.

S&P 500 Index weekly chart - line on close:

Bias to downside as price remains within the MT downtrend channel. Pullback now facing multiple overhead resistance levels, coming from the 40-week MA, top boundary of MT downtrend channel & key historical resistance.

S&P 500 Index daily cash chart:

Upside resistance: 1140, 1175, 1200.
Downside support: 1120, 1100, 1077-1059, 975.

Trader's Guidelines:

Strong media spin on a number of slowing, or down trending economic indicators showing up ticks, was forceful enough last week to sway investor optimism back to the rosy rebound scenario. Investor perception can quickly become self-feeding as desperation feeds avariciously on (false) words of comfort - allowing fear to switch back to greed.

So, whilst traders must be careful not to fight the trend, they must maintain a cautious approach. Friday's rally could be very short lived, given the mkts recent volatility, so look to lock in profits on strength, rather than holding out for bigger gains.

A turnaround in new highs verses new lows on both the Nasdaq & NYSE (again due to optimism, rather than sustainable economic data) is confirming a temporary slowing of downside momentum, but the broader mkt still seems to be reclaiming deeper consolidation action (via a possible re-test of Sept lows), to gain the footing needed for a more meaningful rally.

Traders are short from the 1140 level, with recom to lighten up on solid action over 1135, & final exit no higher than 1147. Although trailing stops allowed us to take some profits, hindsight shows we should have been concentrating on hitting singles, rather than going for the home run. Never a good feeling to give partial profits back to the mkt, even if we are playing with house money :-((

Upside break into prior trending range 1117.00-1175.00 (that closed on high of day & at highs of past 6 weeks) very close to turning trend up in a decisive manner. So, traders should look to exit the major part of short positions at mkt on Monday if upside strength continues. Token shorts can be held until closing confirmation is seen over 1147 (but exit immediately if upside run-away action develops).

Gamblers can buy light preemptive longs on renewed strength after a pullback to 1117 resistance come support, or on continuing strength. Use tight stops to avoid unnecessary losses if the upside break fails to hold (ie, just below 1100 for now), & raise as/when higher lows are made. Take full profits just below the top boundary of prior trading range (ie, between 1165 & 1175). Buy again if sustained breakout over 1175.00 seen.

If stopped out, new shorts can be considered on renewed weakness under 1100, increasing positions on continuing weakness below 1077. Take regular ST profits. Tight trailing stops advise due to choppy/trading range action. Can move stops to breakeven (including brkr fees) after taking profits on ½ of positions.

Nasdaq has been leading downside over recent weeks, so IF temporary strength holds, it should offer better risk/reward than S&P500, having more upside to catch-up.

Best strategy for S&P500 mkt (or any mkt) is to make several attempts to enter using 60/15/5 minute tick charts for better timing, & e-mini's to trade incrementally, in/out in stages. 1 e-mini = $50/pt, compared with $250/full pt.

NYSE advance/decline line

NYSE Comp weekly breadth figures show advances almost tripled declines (2,499-859), advancing volume topped declining volume by a solid ratio of 1.70 to 1, while new highs quadrupled new lows (416-99).

NYSE advance/decline line - weekly line on close:

NYSE A/D line remains overextended with the both weekly & daily Stochastics at extreme levels in their overbought zone (increasing likelihood for consolidation action). Price has almost reached its upside target (6168), calculated by from the point height of the mini trading range. Pullback to 5864 support possible before renewed upside action seen.

Note: NYSE AD line has limited value due to distortion from large number of Preferred & interest sensitive stks, which rise in recessions.

HSLP-NYSE - daily line on close (HSLP = our in-house mkt predictor):

Strong downside divergence coming from our leading in-house indicator HSLP-NYSE, which has already tested & fallen below its Sept lows. As HSLP-NYSE has repeatedly lead action on its benchmark index (sometimes by several months), bias remains heavily to downside.

Nasdaq

The Nasdaq Composite Index closed Friday Mar. 01 at 1802.74 ie, 109.04 points below its 200-day moving average.

Nasdaq Composite weekly breadth figures show advances beat declines (2,415-1,601), advancing volume topped declining volume by a ratio of 1.22 to 1, & new highs topped new lows (265-223). Much less bullish than DJIA, NYSE or S&P.

Nasdaq Composite weekly - line on close:

Nasdaq weekly testing support from April low. Weekly Stochastics in solid downside mode, but slowing momentum indicated by tentative upside turn in faster %D line. Next clear indication of direction will come on break above 2000, or below April low. Breakout above the top boundary of the MT downtrend channel & 40-week MA will give mini green light for bulls.

HSLP-Nasdaq (HSLP = our in-house mkt predictor):

Downside divergence coming from our in-house indicator HSLP-Nasdaq, which has failed to make a higher high while the its benchmark index shows a tentative breakout from its ST down trend channel. HSLP-Nasdaq action reducing probabilities for a sustainable rally in the Nasdaq Comp.

Nasdaq Composite March futures Cx - line on close:

Upside resistance: 1500, 1564, 1731.
Downside support: 1347-1415, 1261.

Traders Guidelines:

Gamblers entered preemptive shorts just below (2000 basis Cash Cx) 1600 basis March futures Cx (& are holding approx profits of approx 164 Nasdaq points :-)).

To avoid giving back partial profits (as we did in the S&P :-(() we recommend traders take full profits at the open Monday if continuing strength is seen.

Daily Nasdaq chart indicating pullback to 1564 resistance & top boundary of ST downtrend channel possible before renewed downside action seen. This possibility confirmed by daily Stochastics that are gaining upside momentum after 3 mini dips into the oversold zone.

Long trades against trend reducing likelihood of easy gains, but charts are offering a spec long trade WITHIN the downtrend channel. Would normally recom sidelines, but Nasdaq has a lot of catch-up to do against most major indexes IF upside resumes, which raises odds to acceptable levels. Gamblers buy light longs ONLY on continuing strength. Tight trailing stop strategy recom, starting no lower than 1375. If strong follow through action not seen immediately on this move, jump to sidelines to limit losses.

Next short trade signal will come on closing weakness under 1345. Or on renewed weakness after failed run towards 1564 resistance.

Traders are advised to use e-mini Nasdaq contracts for incremental trading, in/out in stages. 1 e-mini contract = $20/pt, compared with $100/pt for the full contract.

Market Sentiment

Investors Intelligence shows number of bulls at 47.9%, holding firm with slight rise from 47.4% of 2 weeks ago, & just below 48.5% of 3 weeks ago. Bears at 22.9%.

Market Vane Bullish Consensus at 36.4%, down sharply from 45.2% peak of 2 weeks ago, & down slightly from 37.5% of 3 weeks ago.

The American Association of Investors Intelligence (AAII) bulls at 36.4%, down from 45.2% of 2 weeks ago, & just under 37.5% of 3 weeks ago. Bears at 25.4%, a sharp rise from 16.1% of 2 weeks ago.

Negatively for the long term, Investors Intelligence has been reporting fewer than 30% bears for 14 straight weeks now. Extended periods of low bearish percentages while the stock mkt is declining usually means the mkt will continue to fall for many weeks to come.

Trim Tabs also reported a contraction in net stk mkt liquidity for the week ending Feb 21. Net liquidity has now shrunk in 7 out of the past 8 weeks & 18 out of the last 20 weeks. During the past 37 weeks net liquidity has plunged by $126bn.

Best & Worst Dow Jones US Sectors over 3-months:

Top Performer Home Construction (HOM)
Last: 360.22, Percent Change: 1.71%

5 Best Performing Industries:

Home Construction 35.44%
Home Construction And Furnishings 27.40%
Precious Metals 26.34%
Tires 22.98%
Aerospace 22.11%

5 Worst Performing Industries:

Wireless Communications -45.44%
Communications Technology -27.27%
Pipelines -19.51%
Electric Components And Equipment -18.63%
Biotechnology -16.50%